Phantom Stock Case Studies

Most business leaders would love to find a single pay strategy that could become the answer for compensating their employees. It would be even better if it also carried a label that said something like this: “Just adopt this plan and all of your employees will perform exactly how you want them to.” If it existed, it would be the Holy Grail of compensation design. Companies of all sizes would rush to implement such a plan without delay.

In the real world, everyone recognizes there is no such plan. And this paper isn’t going to reveal one either, notwithstanding its title. However, knowing such a plan doesn’t exist does not prevent wishful thinking on the part of those responsible for engineering and implementing rewards that will “work.” As a result, this paper seeks to help those individuals find a solution to their underlying concerns about effective pay strategies.

Effective problem solving is something with which every organization wrestles. And few are very good at solving the right problem. Consequently, businesses devote time and resources to issues that aren’t central to maintaining or improving a company’s growth trajectory. Inefficiencies emerge and waste is the result. Waste is an unrecoverable, real cost to an enterprise.

Too many business leaders create more problems than they solve when they initiate new pay strategies. Compensation should help remove barriers, not create them. This paper explains why and introduces eight principles that will transform pay into a solution to some of the organization’s most chronic problems.

Trends in compensation are important for a number of reasons, not the least of which is pay programs represent the largest budget item most business leaders have to manage. Add to that factor the economic, business and cultural changes of recent years and you have American companies paying more attention to this issue than probably ever have before—and with greater urgency.

If we are going to adequately address that question and find effective pay solutions that match the evolving environment we’re in, we will need to construct a proper context for how the rewards approaches of tomorrow should differ from those of today.

Many business leaders recognize the need to share value with those who help create it, but are reluctant to give away stock. Nonetheless, they want to foster an ownership mindset particularly among key producers in the organization. For such companies, phantom stock can be an ideal solution. It ties a future reward to the value of the business without diluting owner equity. This white paper explains why phantom stock is garnering so much attention recently among private companies and how it can positively impact the performance of key talent in an organization.

Value sharing is an issue that, sooner or later, every enterprise leader must confront. For example, many responsible for driving business growth wonder whether some kind of longterm incentive will enable higher performance; and if so, which approach is best—stock, performance units, phantom equity or some other value sharing plan. Issues such as cost, impact on the P&L, and other related financial considerations funnel into a discussion whose conclusion very often is, “let’s take this up again next quarter.” Next quarter soon becomes next year, which subsequently evolves into an inertia induced “never.” In the meantime, worries usually fester about diluted productivity, insufficient engagement or the proverbial entitlement mentality.

Here’s a question I get asked quite a bit from business owners who are looking forward to their business succession: “Can I use phantom stock as a way to facilitate my transition out of the business?”

Their intuition is pretty good. Phantom stock and other forms of deferred compensation can be part of the toolkit you should consider—especially if your exit plan might include a sale to existing employees. Here’s how an internal sale usually happens.

Last time I blogged about the results you can achieve with premier talent vs. average talent. The surprising thing is how easily employers are satisfied with average talent even though premier talent is available. Perhaps employers think they can’t afford premier talent. I claim that premier talent is both available and affordable if you are prepared to commit to the following important improvements.

First, discover powerful ways to communicate a compelling future for your organization. Invest in building a business strategy that proves your company is capable of significant growth.

Early this week I presented a webinar titled “Is Your Company a Candidate for Phantom Stock.” If you’re interested, the link can be found here.

In preparation, I pondered the importance to a company of hiring premier talent. Ask yourself about the level of talent in your organization relative to the bell curve of all the talent available in the marketplace. Do your senior leaders fall into the median? Considering the shape of a normal bell curve, they probably do—unless, you’ve applied yourself to attracting the talent on the far right slope of the curve.

Here’s a headline that states unequivocally that SAP (the huge business software company located in Germany) saw a drop in profits for 2012 because of its Phantom Stock plan. The article points out that sales rose by 14% but the Plan resulted in a charge to profits of 512 million Euros (combined with other executive pay). The implication of the article is that shareholders were damaged and profits were hurt because of the Phantom Stock plan.

Here’s my take: a good example of a writer failing to dig deeper to see what may have really happened. Note that I don’t have all the details on the Plan. And I’m also not an expert on German accounting rules. Neither of these is going to stop me from guessing about what is not being said.

Ok, I borrowed part of the title from this great article in last week's Wall Street Journal . It’s by Jeff Ubben, head of an activist investment fund. His main point? Corporate America pays its executives to be too cautious. Why? They orient their pay packages to short-term performance factors and they've moved away from stock options in favor of restricted stock units. Executives, endowed with this short-term perspective, become less concerned with growing actual market value.

To me, this means that private companies are in a better position to pay their executives than their public peers. By “better” I don’t necessarily mean “more.” (Although that could result as well.) “Better” to me means “more aligned;" i.e., better for bjoth the shareholders and for the employees.

Here’s a great story at Bloomberg.com. The former chairman of 24 Hour Fitness has sued the company for failure to pay what she claims was owed under a phantom stock award. We’re only talking $23 million here! Seems like reasonable fees for serving six years on the board, don’t you think?

Apparently the company alleges that the payment “is not a valid obligation of the company.”